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In addition, the explicit language of section 1.263A-
1(f)(4), Income Tax Regs., indicates that the reasonableness
standard should not be read into section 1.451-3(d)(6)(ii),
Income Tax Regs. The reasonableness standard of section 1.263A-
1(f)(4), Income Tax Regs., can apply only when section 263A is at
issue. Section 1.263A-1(f)(4), Income Tax Regs., cannot apply
when only section 460 is at issue. The first of three prongs to
the reasonableness standard states: “The total costs actually
capitalized during the taxable year do not differ significantly”.
Sec. 1.263A-1(f)(4), Income Tax Regs. (emphasis added). While
both sections 263A and 460 are at issue in the instant case, this
will not always be so.
Section 1.451-3(c)(3), Income Tax Regs., requires that under
the percentage of completion method, costs incurred during the
taxable year with respect to a long-term contract must be
deducted in that year. Again, section 1.451-3(d)(6)(ii), Income
Tax Regs., requires that costs must be reasonably allocated among
the taxpayer’s long-term contracts and “other activities”. In
situations where the “other activities” are not subject to the
capitalization requirements of section 263A, the reasonableness
standard of section 1.263A-1(f)(4), Income Tax Regs., cannot
apply because no costs would “actually [be] capitalized”. Thus,
the reasonableness standard of section 1.263A-1(f)(4), Income Tax
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